How well do you know your numbers?
Accountants know their numbers - true or false? Perhaps a better question is who’s numbers do accountants know better; their own or their clients'?
Being more commercial about how you run your accounting firm includes intimate knowledge of what your numbers are telling you. It’s the same for your clients. See how you and your clients stack up against these four rules of knowing your numbers:
Rule #1 - Real-time or history
Let’s stay at the front of the wave. With modern technology, systems and processes, you should have last month’s numbers ready by the 5th of the following month. None of this three to five day month-end billing process; invoice on a monthly recurring contract, on job completion, and ‘mop up’ at the end of each week. Supplier costs are generally known; accrue them in if you feel you must, but generally speaking, month-end cut off issues are not material (you’ll know about the big ones). Detailed management accounts by the 30th of the following month are simply too late.
Rule #2 - Measure the right things
Don’t be romanced by detailed fancy reports, graphs and charts (for you or your clients). Dashboard tools are great, but keep them simple. You don't need to measure any more than five KPIs, as long as they're the right ones. Productivity and write-offs can be manipulated to the point of meaninglessness. A savvy team member might record hours of billable time training a junior team member, knowing that the write off will be assigned to that team member. Measure the Average Hourly Rate (ARR) by team member instead. Billable hours encourages team members to sit at their desks as opposed to taking responsibility for driving new business; measure the number of networking meetings, client education events, or complimentary client meetings held instead. High lock-up numbers (debtor and work in progress days combined) are not to be proud of; that’s the cash you’re not getting even though you’ve done all of the work. If you’ve mastered these for your own firm, make sure you’re applying the same principles to your clients’ reports.
Rule #3 - Define a great day’s work for all team members
Once you’re clear on your most important KPIs for the business, you need to do the same for each team member. Break down each job description into three columns: Key Responsibilities, Tasks and KPIs. For example, a team leader should have a key responsibility of 'Client Relationship Management'. One of the tasks would be to 'Communicate proactively with clients'. The KPI will be ‘A minimum of ten leads for new work generated per month’. When every team member knows their five most important KPIs, they can work to that definition of a great day’s work. Your role is then to 'inspect what you expect' - set up the right measurement and reporting of these KPIs. Again, if you’ve mastered this for your own firm, are you helping your clients to define a great day’s work for their team members?
Rule #4 - Know the benchmarks
Having best practice benchmarks enables everyone on the team to strive to be the best they can be. Openly talk about your expected numbers and the industry benchmarks you need to achieve. As a general rule, the Return on Investment (ROI = Revenue generated / Salaries) for your entire operations team should be north of 250%; the more junior the team member, the higher the ROI (as wages are generally lower and they don’t have high responsibility for sales or marketing). Your Gross Profit (GP = Income less Accounting team wages, outsourcing and software subscriptions) should be north of 60%. Your EBIT should be greater than 20% of revenue. Lock-up (debtor and WIP days) less than 40 days.
If you feel you passed the above tests with flying colours, find others in your team (or clients) to share these ideas with. The best way to do this is to present our Know Your Numbers or Bolstering Your Balance Sheet education webinars to your clients and prospects.
To see our vast array of client education content, book a demo of The Gap here.
"If you don’t know your numbers you don’t know your business."
- Marcus Lemonis